Three Trades For China's Economic Rebound

JINJIANG, CHINA - APRIL 01: Employees work at a toy factory on April 1, 2011 in Jinjiang, Fujian Province of China. China's Manufacturing sector Purchasing Managers Index (PMI) rose to 53.4 percent in March from 52.2 in February, according to the China Federation of Logistics and Purchasing (CFLP) on Friday. (Image credit: Getty Images via @daylife)

China’s economy is rebounding, according to a string of economic reports. The Purchasing Manager’s Index (PMI) released by the China Federation of Logistics and Purchasing Association on Saturday rose to 50.6 percent from 50.2 in October and 49.8 in September.

The China HSBC Flash Manufacturing Index released last weekend rose to 13-month high of 50.4 in November. Another report from Shanghai Securities News published the weekend before indicated that sales of washing machines, air conditioners and refrigerators increased by 6.5 percent, 0.5 percent and 22 percent, respectively, year on year in September.

This jump in manufacturing activity and home-appliances sales should be welcome signs for commodity producers like steel and copper companies that have been waiting for China’s economy to rebound. It further confirms that China is on track to transition from a construction and export-oriented economy to a consumer-oriented economy.

A rebound in the Chinese economy should also be a welcome sign for investors who are ready to nimble into Chinese equities, especially after the precipitous correction in the Chinese market.

Here are three ideas:

First, buy big resource conglomerates like Rio Tinto plc (NYSE:RIO) and BHP Billiton Ltd (NYSE:BHP), which are expected to benefit by a rebound in demand for resources.

Second, buy shares of the iShares of FTSE 25 China Find (NYSE:FXI), which will benefit from a rebound in the overall market; and the large established companies with an oligopoly position like China Mobile (NYSE:CHL), CNOOC (NYSE:CEO), and China Petroleum (NYSE:SNP), which enjoy cozy ties with Beijing government.

Third, buy shares of American companies with a large presence in China like Starbucks (NASDAQ:SBUX), Yum Brands (NYSE:YUM), Coca-Cola(NYSE:KO) and McDonald’s (NYSE:MCD). Last year, for instance, Yum Brands (KFC, Pizza Hut, and Little Sheep) made $1.5 in operating profits in China compared with $315 million 10 years ago, though the company reported weak results last week. Recently, Starbucks reported a big jump in its revenue and profits because of its China expansion.

A few words of caution: A couple of encouraging reports do not necessarily signal a bullish trend. Besides, China continues to face the headwinds of a slowing world economy, especially in Europe, a large market for its exports.